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Alberta royalties miss the point…

While there are a variety of other issues at play it seems that the Fair Share plan, since changed to the New Royalty Framework and most recently rebadged as the Alberta Royalty Framework, isn’t doing much to improve the prospects of the oil industry.

It’s like no-one pictured oil at less than $50/bbl when the Stelmach crew trotted out the updated royalty program, designed by a retired forest executive turned environmentalist and his panel.  The whole problem with the new regime was obtusely acknowledged by the government when they bolted on a transitional royalty equation set that is supposed to provide for relief in low price periods.  But, instead of consulting industry and clearly determining the follow on affects on investment, and comparing Alberta’s structure to those in Saskatchewan and BC, the government decided to move ahead anyway.

The mandate of the new royalties was emphatically stated as: increase the government take by $1-2 billion per year.  This was regardless of the affect that this would have on investment in projects, employment in service industries and the income tax take.  Ed Stelmach and Mel Night have seemingly bought into the idea, continually trumpeted by propagandists like Andrew Nikiforuk, that prosperity of a jurisdiction is almost soley determined by the amount of money the government taxes away from its citizens and their businesses.

So what are the follow on affects?  First, Saskatchewan and BC take in more cash in land (mineral rights) sales than Alberta - both of whom have significantly less coverage in the Western Canadian Sedimentary Basin (WCSB) than Alberta, and both of whom have, until recently, shown themselves to be much more hostile to the oil business.  Second, well before prices for light crude had fallen to less than $50US, the investment in new petroleum drilling and mining projects in Alberta was off by billions - which in turn idled drilling crews, emptied regional hotels and cut the income of most every construction project outside of Calgary, Edmonton and Red Deer, cutting significantly into the tax base.  Much of the investment ended up jumping over the border.  Third, with the price dropping to recent lows the government stands to bring in less than under the old royalty program - Alberta Energy noted that the turning point was at an oil price was $45/bbl (with gas’ threshold at just over $6/GJ), meaning that its plan for scooping a fair share stands a very real chance of not happening.

So then the new program isn’t adequately doing what any of the players in the Alberta oil patch would like.  The government likely gets less through lower royalties with current lower (but certainly not low) prices.  Companies that employ and act as investments for Albertans move billions across the border to invest in more attractive regions.  People who are employed by the oil companies and their service cohort lose their jobs or make less money.  The government again grabs less through lower profits on corporations and with rising unemployment on relatively high wage jobs will take in noticeably less in personal income taxes. Then oil prices drop and the government, who spends more per capita than any provincial jurisdiction in Canada, finds itself facing an operating deficit.

And, all of this seems to be because Stelmach, Knight and the rest of the gang couldn’t picture oil at less than $50/bbl, and deem government take as the benchmark for prosperity.

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